The Rules of the Game has changed

1) Herd Instinct

Volatility breeds profits if in a bear or bull market, as long as there is great movement in indexes, there is profits to be made. Bets are made with a view to short/mid term where the returns of long term is no longer that attractive. With this in mind, it is difficult to control the global markets as funds can move freely.

2) High Frequency Trading

As investors become more sophisticated, computerised trading with risk analysis will give you great leverage on your investment and your risk appetide. As financial institutions do not divulge much on their practices, there could be a repeat of Nick Leeson bankrupting a financial institution if the risks involved is not properly controlled, or not properly funded.

3) The Government/Institutions are unable to control the risks involved

As not much information is publicly available on the practices of different financial institutions, it is difficult to control the risks exposed with a view to fair practices by the financial establishment. It is important to STUDY the Systems involved and AUDIT them for risk management purposes and DISCLOSURE levels for adequate risk insurance and funding. The risk level and exposure could run from a few hundred to few hundred thousand per cent from the trading of about US$10,000 lot analysing from the previous crises, typicalling controlling the entire markets which could be millions of dollars. It is therefore possible to control a market of hundreds of billions with only less than a few hundreds of millions.

4) Therefore in whatever industry, as long you have deep pockets with pure cash and a market maker, with a high percentage of share in that market, it is possible to dominate or monopolised totally like a cartel, if you can read the markets well, and you are not adversed to risks.

It will take another meltdown like the 2008/2009 crises to regulate and control the bad hats involved.

WASHINGTON – US securities regulators voted unanimously to seek public comment on whether they need to write new rules to better address the risks posed by mutual funds, exchange-traded funds and other investment companies that use derivatives.

The decision on Wednesday to solicit input marks an initial step by the Securities and Exchange Commission as it examines the effectiveness of current disclosure and leverage rules as they relate to derivatives.

The fear is that funds can use derivatives to potentially exceed borrowing rules and risk limits, while technically complying with the letter of the law.

The SEC’s interest in derivatives use by investment companies predates the 2007-2009 financial crisis, which laid bare the potential risks of over-the-counter derivatives.

Credit default swaps played a central role in crises at Bear Stearns, Lehman Brothers and American International Group.

SEC chairman Mary Schapiro said that taking a closer look at derivatives use by funds is important because when the 1940 Investment Company Act was written, derivatives “as we now know them did not exist”.

“The Act imposes important leverage, valuation, diversification, and industry concentration requirements to help protect
fund investors. However, those limitations were written with stocks and bonds in mind, not complex financial derivatives,” she said.

“As a result, fund investments in derivatives are not always wholly captured by the statutory limitations and requirements.”

The initial reform push began with former SEC Investment management director Andrew Donohue, who several years ago began questioning whether federal laws governing mutual funds and exchange-traded funds needed to be modernised. He asked the American Bar Association to study the issue. In March 2010, the SEC announced it was conducting its own broad review of derivatives use by investment companies.

The 1940 act places various restrictions on mutual funds, including the amount of money a fund can borrow.

But derivatives can be used as another means to achieve leverage, allowing funds potentially to exceed borrowing rules while still complying with the law.

Derivatives also allow funds to seek exposure to various things such as bonds or stocks, without purchasing them directly.

Existing law primarily addresses direct investments by funds, raising questions about how swaps and other derivatives should be accounted for and valued on their books.

Also on Wednesday, the SEC voted unanimously to seek guidance from the public on two companion documents that will help the agency determine how it should modernise regulations for asset-backed securities issuers and real estate investment trusts, or REITS, which are in the business of acquiring mortgages and mortgage-related instruments.

Both issuers of ABS and REITs generally rely on exemptions from most investment company regulations to be able to operate. The SEC is planning to explore potential changes to the conditions that qualify both entities for exemptions. REUTERS

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Author: Gilbert Tan TS

IT expert with more than 20 years experience in Multiple OS, Security, Data & Internet ,
Interests include AI and Big Data, Internet and multimedia. An experienced Real Estate agent, Insurance agent, and a Futures trader. I am capable of finding any answers in the world you want as long as there are reports available online for me to do my own research to bring you closest to all the unsolved mysteries in this world, because I can find all the paths to the Truth, and what the Future holds. All I need is to observe, test and probe to research on anything I want, what you need to do will take months to achieve, all I need is a few hours.​
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